The Cost of Capital. Chapter 10. Cost of Debt (r d ) The Cost of Capital. Calculating the cost of obtaining funds for a project


 Pearl McCoy
 3 years ago
 Views:
Transcription
1 The Cost of Capital Chapter 10 (def)  Cost of obtaining money to fund asset purchase  use as estimate of r (discount rate) If we can earn more than the cost of capital (r) from a project than company should undertake. The Cost of Capital Accept Project if: Reject Project if: actual return > cost of capital (r) actual return < cost of capital (r) Therefore: cost of capital (r) is minimum return we will accept Calculating the cost of obtaining funds for a project Use the average of the sources of funds (r a ) Sources: (1) debt (r d ) (2) preferred stock (r p ) (3) common stock  retained earnings (r s )  new issue of common stock (r e ) Cost of Debt (r d ) Use after tax yieldtomaturity of bond net of issuance costs [flotation costs (f)] Yieldtomaturity is the rate of return paid to bondholders over the life of a bond
2 Example: Cost of Debt (r d ) sell bond for $1,000 (V b =$1,000) flotation costs = 3% (f d =3%) coupon rate = 10% n = 30 (annual coupon payments) solve for i = r d = 10.32% Aftertax Cost of Debt (r d ) But from a company's viewpoint their cost is net of taxes because they can deduct bond interest from tax return. Aftertax cost of debt = r d (1t) If t = 40% then r d (1t) = (.60) = 6.2% Cost of Debt (r d )  Problem Answer the following questions based on the WSJ bond quote for Microsoft, Incorporated (assume coupons are paid on a semiannual basis). Company (ticker) Microsoft, Inc. (MSFT) Coupon Maturity July 15, 2031 Last Price Last Yield??? Est Spread 115 UST 30 Est $ Vol (000's) 71, What is the YTM for this Microsoft, Inc. Corporate Bond? (Assume today is July 15, 2011) Cost of Preferred Stock (r p ) r p = D p V p (1f p ) Again, f p = flotation costs 2. If Microsoft, Inc. is subject to floatation costs of 2% on a new issue of bonds and have a marginal tax rate of 33%, what is Microsoft s aftertax cost of debt?
3 Cost of Preferred Stock (r p ) Example: D p = 10; V p = 100; f p = 2.5% r p = 10 = 10.26% 100(.975) aftertax cost of preferred stock = beforetax cost of preferred stock Cost of Retained Earnings (r s ) r s = rate of return that current shareholders demand How to calculate: (1) CAPM approach r s = r RF + ß ( r M r RF ) (2) Discounted Cash Flow Method (DCF) r s = (D 1 /P 0 ) + g (3) Bond Yield Plus Risk Premium Approach r s = r d + risk premium Cost of Retained Earnings (r s ) Use the following information for Lyons Incorporated to answer parts A and B of this question. For the general marketplace the riskfree rate is 4 percent (rrf = 4%) and the average rate of return on the market is 10 percent (rm = 10%). Lyons has a beta of 1.6. The dividends of Lyons Inc. are expected to grow at 6 percent per year in the future. Lyons s common stock sells for $23.50 per share and the company just paid a dividend of $1.50 per share (D0=$1.50). 1. Using the discounted cash flow (DCF) approach, what is its cost of common stock? Cost of Newly Issued Common Stock (r e ) r e = D 1 + g P 0 (1f e ) Again, f e = flotation costs 2. What will be the firm s cost of common stock using the CAPM approach?
4 Example: Cost of Newly Issued Common Stock (r e ) D 1 = $2; P 0 = $50; f e = 7%; g = 10% r e = = 14.3% 50(1.07) Cost of Equity  Problem Las Vegas Sand s stock currently sells for $30 per share, expects to pay a dividend of $2.25 next year (D1=$2.25), has a growth rate of 6% that is expected to continue, and new issues of common stock are subject to flotation costs of 7%. 1.What is Las Vegas Sand s cost of retained earnings? 2.What is Las Vegas Sand s cost of new common stock? 3.Why is the cost of new common stock typically higher than the cost of retained earnings? Weighted Average Cost of Capital (WACC = r a ) Now we take the average of rd(1t), rp, rs, and re to find our weighted average cost of capital (WACC)  We will use the WACC to evaluate projects. WACC = ra = wdrd(1t) + wprp + wsrs [ or re ] where, wd is the percent of funds raised through debt, wp is the percent of funds raised through preferred stock, ws is the percent of funds raised through retained earnings or through new common stock. Notes: (1) we assume that we use all cash available from retained earnings before we issue new common stock. (2) we assume that we raise funds from sources according to some target capital structure. WACC = r a Facts: r d (1t) = 6%; r p = 10%; r s = 14%; r e = 15%; Retained Earnings = $5,000,000 Target Capital Structure: 50% debt, 10% preferred stock, 40% common stock PROJECT COST IRR (1) New Warehouse $7.5M 14% (2) Auto Fleet $5M 12% (3) Computers $6M 11% (4) Phone System $4M 9%
5 What is the WACC???? WACC will change  WACC 1 uses cheapest sources WACC 1 = k a1 = use cheapest debt, cheapest preferred stock, and cheapest common stock WACC 1 = w d r d (1t) + w p r p + w s r s =.50(6%) +.10(10%) +.40(14%) = 9.6% Breakpoint When WACC 1 runs out we use WACC 2. When does WACC 1 run out? Assume r d and r p do not change. Therefore, we only run out of r s. When r s is gone use r e. Breakpoint one = when WACC 1 is used up = RE / (% cs in capital structure) = $5,000,000/.40 = $12,500,000 Therefore, first $12.5 million costs the firm 9.6% What is the WACC 2 Money raised over $12.5 million costs WACC 2 Which projects should the firm take? Rank projects and accept according to the following rule WACC 2 = r a2 = w d r d (1t) + w p r p + w s r e =.50(6%) +.10(10%) +.40(15%) = 10.0% Rule: Accept if project return > WACC Therefore, money over $12.5 million costs 10.0% Accept a project if we receive a higher return from project than its cost
6 Which projects should the firm take? Project Cost Return WACC (1) (2) (3) (4) $7.5M $5M $6M $4M 14% 12% 11% 9% 9.6% 9.6% 10.0% 10.0% WACC  Problem PurchasePro.com desires to finance all projects with funds acquired according to their target capital structure of 25% debt, 10% preferred stock, and 65% equity. PurchasePro.com can issue debt at a before tax cost of 8.6% indefinitely, issue preferred stock at a cost of 10.21%, has $13,650,000 of retained earnings at a cost of 13.4%, and can issue new common stock at a cost of 15.7%. PurchasePro.com s marginal tax rate is 28%. 1. What is PurchasePro.com's first weighted average cost of capital (where the cheapest sources of funds are used)? 2. What is the breakpoint for PurchasePro.com's where their cheapest source of funds is exhausted? 3..What is PurchasePro.com's second weighted average cost of capital (after the cheapest sources of funds are exhausted)? Finding a target capital structure Peterson Inc. has 50,000 bonds outstanding with a market price at 78% of par. Peterson also has 1,000,000 shares of common stock outstanding at a market price of $26 and 400,000 shares of preferred stock outstanding at a market price of $22. Peterson s tax rate is 24% and they have $24,000,000 in retained earnings. What are the market value weights of debt, preferred stock, and common stock in Peterson s capital structure?
Chapter 11 Calculating the Cost of Capital
Chapter 11 Calculating the Cost of Capital (def)  Cost of obtaining money to fund asset purchase  use as estimate of r (discount rate) If we can earn more than the cost of capital (r) from a project
More informationSample Problems Chapter 10
Sample Problems Chapter 10 Title: Cost of Debt 1. Costly Corporation plans a new issue of bonds with a par value of $1,000, a maturity of 28 years, and an annual coupon rate of 16.0%. Flotation costs associated
More informationCOST OF CAPITAL Compute the cost of debt. Compute the cost of preferred stock.
OBJECTIVE 1 Compute the cost of debt. The method of computing the yield to maturity for bonds will be used how to compute the cost of debt. Because interest payments are tax deductible, only aftertax
More informationThings to Absorb, Read, and Do
Things to Absorb, Read, and Do Things to absorb  Everything, plus remember some material from previous chapters. This chapter applies Chapter s 6, 7, and 12, Risk and Return concepts to the market value
More informationPRACTICE EXAM QUESTIONS ON WACC
Dr. Sudhakar Raju Financial Statements Analysis (FN 6450) PRACTICE EXAM QUESTIONS ON WACC 1. The return shareholders require on their investment in a firm is called the: a. dividend yield. B. cost of equity.
More informationBH Chapter 9 The Cost of Capital
1 Capital Budgeting Overview Capital Budgeting is the set of valuation techniques for real asset investment decisions. Capital Budgeting Steps estimating expected future cash flows for the proposed real
More informationSAMPLE FACT EXAM (You must score 70% to successfully clear FACT)
SAMPLE FACT EXAM (You must score 70% to successfully clear FACT) 1. What is the present value (PV) of $100,000 received five years from now, assuming the interest rate is 8% per year? a. $600,000.00 b.
More informationSpring 2012. True/False Indicate whether the statement is true or false.
Corporation Finance Spring 2012 Sample Exam 2B True/False Indicate whether the statement is true or false. 1. The total return on a share of stock refers to the dividend yield less any commissions paid
More informationFINC 3630: Advanced Business Finance Additional Practice Problems
FINC 3630: Advanced Business Finance Additional Practice Problems Accounting For Financial Management 1. Calculate free cash flow for Home Depot for the fiscal yearended February 1, 2015 (the 2014 fiscal
More informationSTUDENT CAN HAVE ONE LETTER SIZE FORMULA SHEET PREPARED BY STUDENT HIM/HERSELF. FINANCIAL CALCULATOR/TI83 OR THEIR EQUIVALENCES ARE ALLOWED.
Test IIIFINN3120090 Fall 2009 (2.5 PTS PER QUESTION. MAX 100 PTS) Type A Name ID PRINT YOUR NAME AND ID ON THE TEST, ANSWER SHEET AND FORMULA SHEET. TURN IN THE TEST, OPSCAN ANSWER SHEET AND FORMULA
More informationBonds, Preferred Stock, and Common Stock
Bonds, Preferred Stock, and Common Stock I. Bonds 1. An investor has a required rate of return of 4% on a 1year discount bond with a $100 face value. What is the most the investor would pay for 2. An
More informationCHAPTER 14 COST OF CAPITAL
CHAPTER 14 COST OF CAPITAL Answers to Concepts Review and Critical Thinking Questions 1. It is the minimum rate of return the firm must earn overall on its existing assets. If it earns more than this,
More informationThe cost of capital. A reading prepared by Pamela Peterson Drake. 1. Introduction
The cost of capital A reading prepared by Pamela Peterson Drake O U T L I N E 1. Introduction... 1 2. Determining the proportions of each source of capital that will be raised... 3 3. Estimating the marginal
More informationChapter 13, ROIC and WACC
Chapter 13, ROIC and WACC Lakehead University Winter 2005 Role of the CFO The Chief Financial Officer (CFO) is involved in the following decisions: Management Decisions Financing Decisions Investment Decisions
More informationBF 6701 : Financial Management Comprehensive Examination Guideline
BF 6701 : Financial Management Comprehensive Examination Guideline 1) There will be 5 essay questions and 5 calculation questions to be completed in 1hour exam. 2) The topics included in those essay and
More informationFinance 3130 Corporate Finiance Sample Final Exam Spring 2012
Finance 3130 Corporate Finiance Sample Final Exam Spring 2012 True/False Indicate whether the statement is true or falsewith A for true and B for false. 1. Interest paid by a corporation is a tax deduction
More informationBUSINESS FINANCE (FIN 312) Spring 2008
BUSINESS FINANCE (FIN 312) Spring 2008 Assignment 3 Instructions: please read carefully You can either do the assignment by yourself or work in a group of no more than two. You should show your work how
More informationNIKE Case Study Solutions
NIKE Case Study Solutions Professor Corwin This case study includes several problems related to the valuation of Nike. We will work through these problems throughout the course to demonstrate some of the
More informationChapter 9 The Cost of Capital ANSWERS TO SELEECTED ENDOFCHAPTER QUESTIONS
Chapter 9 The Cost of Capital ANSWERS TO SELEECTED ENDOFCHAPTER QUESTIONS 91 a. The weighted average cost of capital, WACC, is the weighted average of the aftertax component costs of capital debt,
More information( ) ( )( ) ( ) 2 ( ) 3. n n = 100 000 1+ 0.10 = 100 000 1.331 = 133100
Mariusz Próchniak Chair of Economics II Warsaw School of Economics CAPITAL BUDGETING Managerial Economics 1 2 1 Future value (FV) r annual interest rate B the amount of money held today Interest is compounded
More informationCHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING
CHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING Answers to Concepts Review and Critical Thinking Questions 1. No. The cost of capital depends on the risk of the project, not the source of the money.
More informationChapter 6. Interest Rates And Bond Valuation. Learning Goals. Learning Goals (cont.)
Chapter 6 Interest Rates And Bond Valuation Learning Goals 1. Describe interest rate fundamentals, the term structure of interest rates, and risk premiums. 2. Review the legal aspects of bond financing
More informationa) The Dividend Growth Model Approach: Recall the constant dividend growth model for the price of a rm s stock:
Cost of Capital Chapter 14 A) The Cost of Capital: Some Preliminaries: The Security market line (SML) and capital asset pricing model (CAPM) describe the relationship between systematic risk and expected
More informationSOLUTIONS. Practice questions. Multiple Choice
Practice questions Multiple Choice 1. XYZ has $25,000 of debt outstanding and a book value of equity of $25,000. The company has 10,000 shares outstanding and a stock price of $10. If the unlevered beta
More information9. Himal Trading has EBIT of Rs 80,000, interest expense of Rs 12,000, and preferred
Set A Fundamentals of Financial Management Model Questions 2072 Program: BBS Time: 3 Hours Part: III F.M.: 100 Code: MGT 215 P.M.: 35 The objective of the model questions is to give an overview of the
More informationChapter 6 Valuing Bonds. (1) coupon payment  interest payment (coupon rate * principal)  usually paid every 6 months.
Chapter 6 Valuing Bonds Bond Valuation  value the cash flows (1) coupon payment  interest payment (coupon rate * principal)  usually paid every 6 months. (2) maturity value = principal or par value
More informationMBA (3rd Sem) 201314 MBA/29/FM302/T/ODD/1314
Full Marks : 70 MBA/29/FM302/T/ODD/1314 201314 MBA (3rd Sem) Paper Name : Corporate Finance Paper Code : FM302 Time : 3 Hours The figures in the righthand margin indicate marks. Candidates are required
More informationChapter 11 The Cost of Capital ANSWERS TO SELECTED ENDOFCHAPTER QUESTIONS
Chapter 11 The Cost of Capital ANSWERS TO SELECTED ENDOFCHAPTER QUESTIONS 111 a. The weighted average cost of capital, WACC, is the weighted average of the aftertax component costs of capital debt,
More informationt = 1 2 3 1. Calculate the implied interest rates and graph the term structure of interest rates. t = 1 2 3 X t = 100 100 100 t = 1 2 3
MØA 155 PROBLEM SET: Summarizing Exercise 1. Present Value [3] You are given the following prices P t today for receiving risk free payments t periods from now. t = 1 2 3 P t = 0.95 0.9 0.85 1. Calculate
More informationChapter 11 The Cost of Capital
Chapter 11 The Cost of Capital LEARNING OBJECTIVES (Slide 112) 1. Understand the different kinds of financing available to a company: debt financing, equity financing, and hybrid equity financing. 2.
More informationCopyright 2009 Pearson Education Canada
The consequence of failing to adjust the discount rate for the risk implicit in projects is that the firm will accept highrisk projects, which usually have higher IRR due to their highrisk nature, and
More informationEstimating Cost of Capital. 2. The cost of capital is an opportunity cost it depends on where the money goes, not where it comes from
Estimating Cost of Capal 1. Vocabulary the following all mean the same thing: a. Required return b. Appropriate discount rate c. Cost of capal (or cost of money) 2. The cost of capal is an opportuny cost
More informationMBA 8230 Corporation Finance (Part II) Practice Final Exam #2
MBA 8230 Corporation Finance (Part II) Practice Final Exam #2 1. Which of the following input factors, if increased, would result in a decrease in the value of a call option? a. the volatility of the company's
More informationPractice Set #2 and Solutions.
FIN672 Securities Analysis & Portfolio Management Professor Michel A. Robe Practice Set #2 and Solutions. What to do with this practice set? To help MBA students prepare for the assignment and the exams,
More informationCHAPTER 20. Hybrid Financing: Preferred Stock, Warrants, and Convertibles
CHAPTER 20 Hybrid Financing: Preferred Stock, Warrants, and Convertibles 1 Topics in Chapter Types of hybrid securities Preferred stock Warrants Convertibles Features and risk Cost of capital to issuers
More informationPractice Questions for Midterm II
Finance 333 Investments Practice Questions for Midterm II Winter 2004 Professor Yan 1. The market portfolio has a beta of a. 0. *b. 1. c. 1. d. 0.5. By definition, the beta of the market portfolio is
More informationYou just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of return are you earning on this policy?
1 You estimate that you will have $24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each
More informationChapter 7. . 1. component of the convertible can be estimated as 1100796.15 = 303.85.
Chapter 7 71 Income bonds do share some characteristics with preferred stock. The primary difference is that interest paid on income bonds is tax deductible while preferred dividends are not. Income bondholders
More information Once we have computed the costs of the individual components of the firm s financing,
WEIGHTED AVERAGE COST OF CAPITAL  Once we have computed the costs of the individual components of the firm s financing, we would assign weight to each financing source according to some standard and then
More informationCFS. Syllabus. Certified Finance Specialist. International benchmark in Finance profession
CFS Certified Finance Specialist Syllabus International benchmark in Finance profession Certified Finance Specialist Summary: This award will provide candidates the opportunity to gain advanced level knowledge
More informationBonds. Describe Bonds. Define Key Words. Created 2007 By Michael Worthington Elizabeth City State University
Bonds OBJECTIVES Describe bonds Define key words Explain why bond prices fluctuate Compute interest payments Calculate the price of bonds Created 2007 By Michael Worthington Elizabeth City State University
More informationExam 1 Morning Session
91. A high yield bond fund states that through active management, the fund s return has outperformed an index of Treasury securities by 4% on average over the past five years. As a performance benchmark
More informationHigher National Diploma in Business Administration Second Year, First Semester Examination 2014 BA 2113  Business Finance
[All Rights Reserved] SLIATE SRI LANKA INSTITUTE OF ADVANCED TECHNOLOGICAL EDUCATION (Established in the Ministry of Higher Education, vide in Act No. 29 of 1995) Higher National Diploma in Business Administration
More informationTYLER JUNIOR COLLEGE School of Continuing Studies 1530 SSW Loop 323 Tyler, TX 75701 1.800.298.5226 www.tjc.edu/continuingstudies/mycaa
TYLER JUNIOR COLLEGE School of Continuing Studies 1530 SSW Loop 323 Tyler, TX 75701 1.800.298.5226 www.tjc.edu/continuingstudies/mycaa Education & Training Plan Finance Professional Program Student Full
More informationInterest Rates and Bond Valuation
Interest Rates and Bond Valuation Chapter 6 Key Concepts and Skills Know the important bond features and bond types Understand bond values and why they fluctuate Understand bond ratings and what they mean
More informationChapter 6 Interest Rates and Bond Valuation
Chapter 6 Interest Rates and Bond Valuation Solutions to Problems P61. P62. LG 1: Interest Rate Fundamentals: The Real Rate of Return Basic Real rate of return = 5.5% 2.0% = 3.5% LG 1: Real Rate of Interest
More informationVALUATION JC PENNEY (NYSE:JCP)
VALUATION JC PENNEY (NYSE:JCP) Prepared for Dr. K.C. Chen California State University, Fresno Prepared by Sicilia Sendjaja Finance 129Student Investment Funds December 15 th, 2009 California State University,
More informationChapter 5: Valuing Bonds
FIN 302 Class Notes Chapter 5: Valuing Bonds What is a bond? A longterm debt instrument A contract where a borrower agrees to make interest and principal payments on specific dates Corporate Bond Quotations
More informationDUKE UNIVERSITY Fuqua School of Business. FINANCE 351  CORPORATE FINANCE Problem Set #4 Prof. Simon Gervais Fall 2011 Term 2.
DUK UNIRSITY Fuqua School of Business FINANC 351  CORPORAT FINANC Problem Set #4 Prof. Simon Gervais Fall 2011 Term 2 Questions 1. Suppose the corporate tax rate is 40%. Consider a firm that earns $1,000
More informationMidTerm Exam Practice Set and Solutions.
FIN469 Investments Analysis Professor Michel A. Robe MidTerm Exam Practice Set and Solutions. What to do with this practice set? To help students prepare for the midterm exam, two practice sets with
More informationCHAPTER 14: BOND PRICES AND YIELDS
CHAPTER 14: BOND PRICES AND YIELDS PROBLEM SETS 1. The bond callable at 105 should sell at a lower price because the call provision is more valuable to the firm. Therefore, its yield to maturity should
More informationCIS September 2012 Exam Diet. Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis
CIS September 2012 Exam Diet Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis Corporate Finance (1 13) 1. Assume a firm issues N1 billion in debt
More informationClick Here to Buy the Tutorial
FIN 534 Week 4 Quiz 3 (Str) Click Here to Buy the Tutorial http://www.tutorialoutlet.com/fin534/fin534week4quiz3 str/ For more course tutorials visit www.tutorialoutlet.com Which of the following
More informationThe Weighted Average Cost of Capital
The Weighted Average Cost of Capital What Does "Cost of Capital" Mean? "Cost of capital" is defined as "the opportunity cost of all capital invested in an enterprise." Let's dissect this definition: Opportunity
More informationExpected default frequency
KM Model Expected default frequency Expected default frequency (EDF) is a forwardlooking measure of actual probability of default. EDF is firm specific. KM model is based on the structural approach to
More informationThe Tangent or Efficient Portfolio
The Tangent or Efficient Portfolio 1 2 Identifying the Tangent Portfolio Sharpe Ratio: Measures the ratio of rewardtovolatility provided by a portfolio Sharpe Ratio Portfolio Excess Return E[ RP ] r
More informationChapter 11. Stocks and Bonds. How does this distribution work? An example. What form do the distributions to common shareholders take?
Chapter 11. Stocks and Bonds Chapter Objectives To identify basic shareholder rights and the means by which corporations make distributions to shareholders To recognize the investment opportunities in
More informationMethodological Tool. Draft tool to determine the weighted average cost of capital (WACC) (Version 01)
Page 1 Methodological Tool Draft tool to determine the weighted average cost of capital (WACC) (Version 01) I. DEFINITIONS, SCOPE, APPLICABILITY AND PARAMETERS Definitions For the purpose of this tool,
More informationCorporate Finance: Final Exam
Corporate Finance: Final Exam Answer all questions and show necessary work. Please be brief. This is an open books, open notes exam. For partial credit, when discounting, please show the discount rate
More information1. Section A carries a total of 40 marks and each question in Section B carries a total of 20 marks.
FACULTY OF COMMERCE DEPARTMENT OF FINANCE BACHELOR OF COMMERCE HONOURS DEGREE IN FINANCE PART II 2 ND SEMESTER FINAL EXAMINATION MAY 2011 CORPORATE FINANCE [CFI 2201] TIME ALLOWED : 3 HOURS INSTRUCTIONS
More informationBond Valuation. What is a bond?
Lecture: III 1 What is a bond? Bond Valuation When a corporation wishes to borrow money from the public on a longterm basis, it usually does so by issuing or selling debt securities called bonds. A bond
More informationWeighted Average Cost of Capital (WACC)
Financial Modeling Templates (WACC) http://spreadsheetml.com/finance/weightedaveragecostofcapital.shtml Copyright (c) 20092014, ConnectCode All Rights Reserved. ConnectCode accepts no responsibility for
More information1. If the opportunity cost of capital is 14 percent, what is the net present value of the factory?
MØA 155  Fall 2011 PROBLEM SET: Hand in 1 Exercise 1. An investor buys a share for $100 and sells it five years later, at the end of the year, at the price of $120.23. Each year the stock pays dividends
More informationAnswers to Review Questions
Answers to Review Questions 1. The real rate of interest is the rate that creates an equilibrium between the supply of savings and demand for investment funds. The nominal rate of interest is the actual
More informationChapter Review Problems
Chapter Review Problems State all stock and bond prices in dollars and cents. Unit 14.1 Stocks 1. When a corporation earns a profit, the board of directors is obligated by law to immediately distribute
More informationCHAPTER 8 INTEREST RATES AND BOND VALUATION
CHAPTER 8 INTEREST RATES AND BOND VALUATION Solutions to Questions and Problems 1. The price of a pure discount (zero coupon) bond is the present value of the par value. Remember, even though there are
More informationPaper F9. Financial Management. Thursday 10 June 2010. Fundamentals Level Skills Module. The Association of Chartered Certified Accountants
Fundamentals Level Skills Module Financial Management Thursday 10 June 2010 Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FOUR questions are compulsory and MUST be attempted. Formulae
More informationof Investments Fundamentals Security Types C h a p t e r Valuation & Management second edition Charles J.Corrado Bradford D.
3 C h a p t e r Security Types 31 Fundamentals of Investments Valuation & Management second edition Charles J.Corrado Bradford D.Jordan Slides by YeeTien (Ted) Fu 32 Security Types Goal Our goal in
More informationLevel 6 Advanced Diploma in Finance (531) 126 Credits
Level 6 Advanced Diploma in Finance (531) 126 Credits Unit: Finance Theory Guided Learning Hours: 210 Exam Paper No.: 4 Prerequisites: Knowledge of Finance. Number of Credits: 21 Corequisites: A pass or
More informationCost of Capital Basics
Cost of Capital Basics The corporate cost of capital is a blend (weighted average) of the costs of the financing components. It is used as a benchmark rate of return in new new project evaluations. Key
More informationBUSINESS FINANCE (FIN 312) Spring 2009
BUSINESS FINANCE (FIN 31) Spring 009 Assignment Instructions: please read carefully You can either do the assignment by yourself or work in a group of no more than two. You should show your work how to
More informationCost of Capital and Project Valuation
Cost of Capital and Project Valuation 1 Background Firm organization There are four types: sole proprietorships partnerships limited liability companies corporations Each organizational form has different
More informationANALYSIS OF FIXED INCOME SECURITIES
ANALYSIS OF FIXED INCOME SECURITIES Valuation of Fixed Income Securities Page 1 VALUATION Valuation is the process of determining the fair value of a financial asset. The fair value of an asset is its
More informationINTERVIEWS  FINANCIAL MODELING
420 W. 118th Street, Room 420 New York, NY 10027 P: 2128544613 F: 2128546190 www.sipa.columbia.edu/ocs INTERVIEWS  FINANCIAL MODELING Basic valuation concepts are among the most popular technical
More informationDCF and WACC calculation: Theory meets practice
www.pwc.com DCF and WACC calculation: Theory meets practice Table of contents Section 1. Fair value and company valuation page 3 Section 2. The DCF model: Basic assumptions and the expected cash flows
More informationTopics in Chapter. Key features of bonds Bond valuation Measuring yield Assessing risk
Bond Valuation 1 Topics in Chapter Key features of bonds Bond valuation Measuring yield Assessing risk 2 Determinants of Intrinsic Value: The Cost of Debt Net operating profit after taxes Free cash flow
More informationCORPORATE FINANCE REVIEW FOR THIRD QUIZ. Aswath Damodaran
CORPORATE FINANCE REVIEW FOR THIRD QUIZ Aswath Damodaran Basic Skills Needed What is the trade off involved in the capital structure choice? Can you estimate the optimal debt ratio for a firm using the
More informationInvestments 320 Dr. Ahmed Y. Dashti Chapter 3 Interactive Qustions
Investments 320 Dr. Ahmed Y. Dashti Chapter 3 Interactive Qustions 31. A primary asset is an initial offering sold by a business, or government, to raise funds. A) True B) False 32. Money market instruments
More informationMGT201 Solved MCQs(500) By
MGT201 Solved MCQs(500) By http://www.vustudents.net Why companies invest in projects with negative NPV? Because there is hidden value in each project Because there may be chance of rapid growth Because
More informationAppendix B Weighted Average Cost of Capital
Appendix B Weighted Average Cost of Capital The inclusion of cost of money within cash flow analyses in engineering economics and lifecycle costing is a very important (and in many cases dominate) contributing
More informationLeverage. FINANCE 350 Global Financial Management. Professor Alon Brav Fuqua School of Business Duke University. Overview
Leverage FINANCE 35 Global Financial Management Professor Alon Brav Fuqua School of Business Duke University Overview Capital Structure does not matter! Modigliani & Miller propositions Implications for
More informationPractice Exam (Solutions)
Practice Exam (Solutions) June 6, 2008 Course: Finance for AEO Length: 2 hours Lecturer: Paul Sengmüller Students are expected to conduct themselves properly during examinations and to obey any instructions
More informationEquity Analysis and Capital Structure. A New Venture s Perspective
Equity Analysis and Capital Structure A New Venture s Perspective 1 Venture s Capital Structure ASSETS Short term Assets Cash A/R Inventories Long term Assets Plant and Equipment Intellectual Property
More informationValue of Equity and Per Share Value when there are options and warrants outstanding. Aswath Damodaran
Value of Equity and Per Share Value when there are options and warrants outstanding Aswath Damodaran 1 Equity Value and Per Share Value: A Test Assume that you have done an equity valuation of Microsoft.
More information1 (a) Calculation of net present value (NPV) Year 1 2 3 4 5 6 $000 $000 $000 $000 $000 $000 Sales revenue 1,600 1,600 1,600 1,600 1,600
Answers Fundamentals Level Skills Module, Paper F9 Financial Management December 2011 Answers 1 (a) Calculation of net present value (NPV) Year 1 2 3 4 5 6 $000 $000 $000 $000 $000 $000 Sales revenue 1,600
More informationChapter 19. Web Extension: Rights Offerings and Zero Coupon Bonds. Rights Offerings
Chapter 19 Web Extension: Rights Offerings and Zero Coupon Bonds T his Web Extension discusses two additional topics in financial restructuring: rights offerings and zero coupon bonds. Rights Offerings
More informationPart 9. The Basics of Corporate Finance
Part 9. The Basics of Corporate Finance The essence of business is to raise money from investors to fund projects that will return more money to the investors. To do this, there are three financial questions
More informationEducation & Training Plan Finance Professional Certificate Program with Externship
Testing Services and Programs 1200 N. DuPont Highway Dover, DE 19901 https://www.desu.edu/academics/mycaa Contact: Amystique HarrisChurch 302.857.6143 achurch@desu.edu Student Full Name: Education & Training
More informationModule 1: Corporate Finance and the Role of Venture Capital Financing TABLE OF CONTENTS
1.0 ALTERNATIVE SOURCES OF FINANCE Module 1: Corporate Finance and the Role of Venture Capital Financing Alternative Sources of Finance TABLE OF CONTENTS 1.1 ShortTerm Debt (ShortTerm Loans, Line of
More informationFNCE 301, Financial Management H Guy Williams, 2006
REVIEW We ve used the DCF method to find present value. We also know shortcut methods to solve these problems such as perpetuity present value = C/r. These tools allow us to value any cash flow including
More informationEducation & Training Plan Finance Professional Certificate Program with Externship
Student Full Name: University of Texas at El Paso Professional and Public Programs 500 W. University Kelly Hall Ste. 212 & 214 El Paso, TX 79968 http://www.ppp.utep.edu/ Contact: Sylvia Monsisvais 9157477578
More informationMultiple Choice Questions (45%)
Multiple Choice Questions (45%) Choose the Correct Answer 1. The following information was taken from XYZ Company s accounting records for the year ended December 31, 2014: Increase in raw materials inventory
More informationFinancial Markets and Valuation  Tutorial 6: SOLUTIONS. Capital Structure and Cost of Funds
Financial Markets and Valuation  Tutorial 6: SOLUTIONS Capital Structure and Cost of Funds (*) denotes those problems to be covered in detail during the tutorial session (*) Problem 1. (Ross, Westerfield
More informationSource of Finance and their Relative Costs F. COST OF CAPITAL
F. COST OF CAPITAL 1. Source of Finance and their Relative Costs 2. Estimating the Cost of Equity 3. Estimating the Cost of Debt and Other Capital Instruments 4. Estimating the Overall Cost of Capital
More informationPaper F9. Financial Management. Friday 7 June 2013. Fundamentals Level Skills Module. The Association of Chartered Certified Accountants.
Fundamentals Level Skills Module Financial Management Friday 7 June 2013 Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FOUR questions are compulsory and MUST be attempted. Formulae
More informationActuarial Society of India
Actuarial Society of India Examination November 2006 CT2: Finance and Financial Reporting Indicative Solutions Page 1 of 7 Solution 110 Sol 1 Sol 2 Sol 3 Sol 4 Sol 5 Sol 6 Sol 7 Sol 8 Sol 9 Sol 10 E E
More informationCoupon Bonds and Zeroes
Coupon Bonds and Zeroes Concepts and Buzzwords Coupon bonds Zerocoupon bonds Bond replication Noarbitrage price relationships Zero rates Zeroes STRIPS Dedication Implied zeroes Semiannual compounding
More informationFinal Exam Practice Set and Solutions
FIN469 Investments Analysis Professor Michel A. Robe Final Exam Practice Set and Solutions What to do with this practice set? To help students prepare for the final exam, three practice sets with solutions
More informationCHAPTER 14: BOND PRICES AND YIELDS
CHAPTER 14: BOND PRICES AND YIELDS 1. a. Effective annual rate on 3month Tbill: ( 100,000 97,645 )4 1 = 1.02412 4 1 =.10 or 10% b. Effective annual interest rate on coupon bond paying 5% semiannually:
More information